These 4 Measures Indicate That Hero MotoCorp (NSE:HEROMOTOCO) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Hero MotoCorp Limited (NSE:HEROMOTOCO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Hero MotoCorp

How Much Debt Does Hero MotoCorp Carry?

As you can see below, Hero MotoCorp had ₹4.01b of debt at September 2023, down from ₹4.68b a year prior. But on the other hand it also has ₹36.3b in cash, leading to a ₹32.3b net cash position.

A Look At Hero MotoCorp's Liabilities

The latest balance sheet data shows that Hero MotoCorp had liabilities of ₹73.5b due within a year, and liabilities of ₹11.6b falling due after that. Offsetting this, it had ₹36.3b in cash and ₹42.5b in receivables that were due within 12 months. So its liabilities total ₹6.34b more than the combination of its cash and short-term receivables.

Having regard to Hero MotoCorp's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₹713.3b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Hero MotoCorp boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Hero MotoCorp has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Hero MotoCorp's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Hero MotoCorp has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Hero MotoCorp's free cash flow amounted to 44% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Hero MotoCorp has ₹32.3b in net cash. And it impressed us with its EBIT growth of 24% over the last year. So is Hero MotoCorp's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Hero MotoCorp has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.